Foxconn's lessons: 3 supply-chain pitfalls to avoid

Foxconn's lessons: 3 supply-chain pitfalls to avoid

How can companies avoid missteps in the supply chain that can lead to snafus like the embarrassing exposure of dubious labor practices at Apple’s Chinese supplier factory, Foxconn?

One way, says Taryn Sullivan, founder and CEO of Efficiency Exchange (EEx), is to show local factories why better, more sustainable practices can actually help their business, not just serve as a stepping stone to cut deals with multinational customers.

EEx, a startup that is building a technology platform to help suppliers and buyers reduce operating costs, believes there are new ways to drive sustainability throughout the chain.

The company’s recent report, researched by U.S. and Chinese students, looked at “what’s happening on the ground in China, what stakeholders there really think and what challenges are facing them that critical stakeholders in the process, like multinational retail buyers or NGOs, don’t know about,” says Sullivan, who speaks Mandarin and worked as a sourcing and product development manager for global brands in China and other developing markets for five years.

Three Supplier Trends

Three trends in Chinese factories are leading to a new technology platform, still in development, that puts the local factory at the center of data collection and improved sustainability practices, according to the report. The platform is aimed at addressing problematic supplier relationships that can hurt both local manufacturers and their multinational buyers:

1. Short-termism: Because the retail sector moves so fast to just to keep up with demand for the latest trends, international brands often have poor relationships with local factories, mainly because the deals are short term and often demand near-instant turnaround.

“That doesn’t do much for the confidence of the supplier, so when the factory is asked to meet higher compliance standards, there’s not much incentive,” Sullivan says.

What’s more, each brand has its own standards and compliance manuals, which is a lot to master, especially when the factory has to get the product out fast, usually at a lower price than competitors.

2. Lack of local capacity: “There’s more general awareness [on the part of factories], but the factory doesn’t have the tools to implement initiatives, even if they’re aware of the problems. The management systems and programs have all been geared toward meeting the needs of the retailer, not the factory,” she points out.

“What would be useful for a factory -- and help the retailer reduce supply chain emissions -- would be the factory’s capability to track and lower energy use, monitor and manage itself, and then report by itself. But the system doesn’t even exist for the factory.”

3. Distrust: This lack of transparency at the factory level contributes to distrust. “If retailers had more and better data about what’s happening in the local factories, they’d have more confidence in the manufacturer” and an incentive to do more business with it, Sullivan explains. “And if they have better data, they’d have the information they need to manage and extend the relationship.”

For instance, many big brands enforce standards via walk-through auditing visits -- hundreds per year -- to ask questions and gather social and environmental data from the factory.

“Audits are a limited way of seeing whether the factory is really in compliance, and the factory is given no tools or incentives to change practices and improve,” mainly because there’s little reason for them to think the international customer will stick around over the long term, Sullivan says.

“Why spend money to retrofit facilities and reduce emissions if the brand won’t be back next season?”

Instead, the vicious cycle creates more distrust, less transparency and little incentive to build a “platform that helps buyers and suppliers work together and solve problems,” she concludes.

What Motivates Companies to Change?

Fortunately, there’s increasing motivation for both factories and buyers to change, largely from external sources, including customers, NGOs, investors and the Chinese government.

And once those motivations line up with the needs of the factory itself, real improvements might start to happen.

“What’s needed is the tools,” Sullivan says.

Which is why EEx sees an important niche for its platform, still under construction, to identify savings for the factory, and at the same time help customers track and monitor improvements to drive lasting, positive change in the supply chain. Stay tuned for the launch this summer.